Current Dividend Preference

DEFINITION of 'Current Dividend Preference'

A safety feature of preferred shares, whereby holders of such shares are entitled to receive dividends before common shareholders. Current dividend preference means that preferred shareholders have priority or preference over common shareholders when it comes to dividend distributions. This feature implies that under no circumstances can dividends be paid to common shareholders before preferred shareholders.

BREAKING DOWN 'Current Dividend Preference'

Dividend distributions depend on a number of factors such as the company's operating performance, level of retained earnings and payout ratio. While dividend payments on common shares are largely at the company's discretion, preferred dividends generally have a greater degree of stability. For example, consider a company, Widget Co., that has 4 million preferred shares with a face value of $25 outstanding; these shares have a stipulated dividend of 5%. Widget Co. also has 100 million common shares outstanding, on which it has been paying dividends of 20 cents. This means that Widget Co. pays out $5 million in preferred dividends and $20 million in common share dividends. If Widget Co. has a healthy financial position and is consistently profitable, paying these dividends should not cause it any problems. If it has a couple of unprofitable or marginally profitable years, however, it may consider trimming dividends on its common stock, or even suspending them altogether. But even in this scenario, it must pay the preferred shares dividend, either in this period or at a later date.